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Category Archive: Working Capital

Managing Working Capital

Keys to Managing A Businesses Working Capital

For businesses small and large, managing working capital, primarily accounts receivable and inventory is critical for a business to be successful in managing its cash flow. Managing these working capital components can be both time consuming and frustrating. It can be very helpful if you factor your accounts receivable or secure an ABL facility. Factoring is basically selling your accounts receivable as they are generated essentially turning your sales on credit into cash sales. There is a discount, which if you have razor thin margins can be a bit pricey, otherwise factoring can be a life saver. This is particularly so if your customers don’t always pay you on time. An ABL credit facility can also be very helpful. ABL facilities essentially are a line of credit based on your accounts receivables and inventory, excluding work in progress. This also gets you cash much quicker than waiting on 1) Customers to pay you and 2) Converting your inventory into receivables through the sale of goods and services.

Many business that are technically profitable, even very profitable have gone out of business. How, you may be asking. Simply by not managing cash flow. What this results in is not having the cash to pay bills when they come due. Not having cash can snowball on a business and kill it. That’s why managing working capital is so critical. Staying on top of your accounts receivables and inventory will help minimize the problems a business encounters with its cash flow. As a business grows, hiring a full time employee or employees to do these tasks becomes a necessity versus a luxury. A business can also use a contractor who specializes in managing these assets, particularly accounts receivables. The only downside to contracting out the management of your accounts receivables is the fact that your contractor is in contact with your customers, the life blood of your business, so choose them carefully. Even then you want to monitor how they relate to your customers. Contracting out inventory management is much less risky and there are some very good logistics (the primary component of inventory management) companies. Many fortune 500  companies use logistics services companies to manage their inventory and most importantly, its movement. For you or a logistics services provider to manage inventory, you need good internal inventory management software. Most inventory depends heavily on sales forecasts so as the old adage says, ‘garbage in, garbage out’. So be sure your sales forecasters whether they be an administrative function or your sales force provides realistic sales forecasts.

So the bottom line is this. Make working capital management a high priority for your business, whether you have a new startup business or a business that’s been around a while but struggles with cash flow management. Utilize an ABL loan, factoring or whatever outsource management services you need to insure this is Taken care of. Your business will thank you with less management stress and more profits and cash in the bank. Good luck.